Second Quarter Market Summary
Assets in the second quarter continued their downward trend. The second consecutive quarter with the combination of rising rates (negative bond returns) and falling stock prices have produced negative returns for most investor portfolios.
US stocks fell 16.8% during the second quarter, bringing the loss to 20.9% for the first six months of the year. Even value stocks were not spared during the quarter. The Russell 1000 Value index was down 12.2% for the quarter, while the Russell 1000 Growth Index was down 20.9%.
International stocks fell 13.7% for the quarter, outperforming domestic stocks even as US Dollar strengthened. Emerging market stocks outperformed their developed market counterparts, being led by a strong rebound in Chinese markets.
The 10-year Treasury yield continued to rise significantly to end the quarter at 3.01%. The Treasury yield curve remains incredibly flat. For instance, as of the end of the quarter, a 1-year Treasury had a yield of 2.92%, just 9 bps less than the 10-year note.
Below is a table highlighting various market index returns over the past 3, 12, and 36 months:
Commentary
With you benefit of hindsight, investors may feel that they should have sold their stocks late last year. Some others may still feel like they should still sell soon because the outlook is bleak. Many investors (if not all to some extent) likely feel some level of fear about what will come next.
What should investors do when a market downturn turns into a bear market? A bear market is defined as a drawdown from the high of 20% or more. We are currently six months into this latest bear market and clients often ask, “Where is the bottom?” The answer is that no one knows where the bottom is or when sentiment will change for the better.
We can look at history to help us understand what’s going on now. As seen below (right), the average bear market lasts around 20 months and sees a decline of 41%. These numbers are skewed by the two big drops of the Great Depression. If these two occurrences were omitted, the average bear market would last just 15 months (peak to trough) and be down 35% during that time. Of course, these are just averages, and bear markets have lasted just one month to multiple years.
Source: JP Morgan Guide to the Markets – as of June 30, 2022
Are we at the bottom? We’re not sure. How long will the market take to recover its losses and reach new highs? We’re not sure of that either. What we do know it is that if you invested in the S&P 500 at the end of the quarter and it takes three years to fully recover back to new highs, an investor’s return would be 10% per year (above, left). That’s a decent annualized gain which doesn’t depend on stocks going lower from here or immediately higher.
In our opinion, clients will get a better result by looking at the long-term instead of trying to predict how inflation or Russia will move the market in the short-term and trying to time the market bottom. In the chart below, you can see the long-term trend of the market is higher.
Source: Yahoo Finance
That’s not to stay that sitting back and “staying the course” is the only option. There are smart moves that clients and investors can take advantage of during market downturns. All of these items outlined below will not apply to everyone, if you have questions on how they apply to your specific situation, please give us a call.
Tax Loss Harvesting
With both stocks and bonds down double digits, there may be losses worth realizing across taxable accounts. These losses can be used to offset gains later in the year or taxpayers can use up to $3,000 per year against ordinary income on their tax return. It’s often beneficial to have this tax asset on your balance sheet.
Rebalancing
Market downturns are often an excellent time to look to add to underweight positions in your portfolio. When stocks are down 20% or more, investors can often sell bonds (which are likely down less than stocks) and buy stocks for the long-term to bring their portfolio back in-line with the stated targets in your Investment Policy Statement.
Cash Additions
Some investors have been sitting on cash, just waiting to put it to work. Now could be a good time for long-term investment or to implement a dollar cost average plan. As I said above, no one knows if were at the bottom, but do not focus on which way the next 5% or 10% move will be, focus on which way the next 50% move will be.
ROTH Conversions
Depending on your tax situation, market downturns could be an opportune time to convert money from traditional IRAs to ROTH IRAs. You will have to pay taxes on the converted assets now, but all of the growth will be tax free.
Accelerate Contributions
Investors can consider making IRA or 401k contributions now. If you typically wait until late in the year or early next year to make your IRA contributions, making them when the market is down could produce a better return. You could also accelerate your 401k contributions to get more money in your 401k while the market is down, just be careful of your companies matching policy so that you don’t leave match money on the table.
We understand these are difficult times for the market and investors, if you ever have any questions or concerns, please do not hesitate to reach out.
Enjoy the rest of the summer.
JR Geld, CFA, CFP®
jgeld@hwafinancialgroup.com
Philip E. Huber, Jr, CPA, CFP®
phuber@hwafinancialgroup.com
HWA Financial Group
3448 Ellicott Center Dr.
Suite 101
Ellicott City, MD 21043
410-696-4025
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